02/24/2013

Mexico and its contrarian indicators

For those bullish on Mexico, Sunday was a big day. Thomas Friedman, the New York Times foreign affairs columnist, published a glowing essay on why Americans should look next door to Mexico as the country to watch, not China or India.

The essay, titled How Mexico got Back in the Game, notes that Mexico has 44 free-trade agreements, more than any other country in the world, and the country sits atop “massive cheap natural gas finds.”

The three main political parties have signed a pact “to fight the big energy, telecom and teacher monopolies that have held Mexico back.” Americans, Friedman says, need a “more nuanced” view of Mexico but should be quite bullish on the nation.

There are many ways to slice Friedman’s essay. And some analysts went to work immediately. One is George Baker, a Houston-based energy analyst who lived for a time in Mexico. He quickly whipped off a comment to the Grey Lady taking apart Friedman’s argument. Here is one paragraph on trade:

“Take out intra-firm transactions in which Chrysler-Mexico sells to Chrysler-China, and daily trade will shrink to the value of commerce in oil and food products, services (including oilfield services), plus the remnants of a tourism industry battered by violence. Meanwhile, Carlos Slim skims off the top of the Mexican economy monopolistic rent whose value has been estimated by Mexican economists at 3% of Mexico’s GDP.”

Baker dismissed the reference to huge shale oil reserves – “Pemex has no plans to develop shale fields” – and concludes that, “Celebrations about Mexico’s advances in its economy and governance are premature.”

If the enthusiasm (or hype) about Mexico is reminiscent of the euphoria for Brazil back around 2009, then Friedman’s essay may actually be a contrarian indicator. Friedman was a regular visitor to Brazil back then. Here’s one of his columns.

As a colleague noted at a weekly bull session we foreign reporters hold on Friday evenings, Brazil seemed at the top of the emerging market heap back then, the lead nation of the BRICS (Brazil, Russia, India, China and, later, South Africa). But the BRICS are now passé. And Brazil has posted anemic growth for several years.

Indeed, the benchmark Bovespa index is down 16% since the end of 2010.

Maybe the apathy for Brazil is overdone. And the euphoria for Mexico also an overreaction.

Certainly the number of free-trade agreements that Mexico has signed does not indicate how open the economy is. It only takes a trip to Office Max, the neighborhood supermarket or a furniture stores to see hidden barriers to entry in Mexico. Why are Hewlett Packard printers assembled in Mexico not available here? Why are Sony plasma screen TVs assembled in Mexico cheaper in the States than here? If it's so open, why are there so many monopolies and duopolies?

This is not Taipei, Singapore or even some Central American capitals. There are many things you cannot get here or that are quite costly. Anybody go in the Liverpool department store and look at prices lately?

I don’t find my reporting colleagues here a cynical group. Mexico-bashing is not a practice. Many are married to Mexicans, are Mexican themselves or have lived here for decades. That’s a short way of saying they want Mexico to progress and flourish. But the obstacles are many. Governance and security issues are critical. Corruption is rampant. It is too early to pop the champagne.

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It has been a little over 100 years ago since the publication in 1910 of John Kenneth Turner's "Barbarous Mexico," an indictment of the Porfirio Diaz government policies then that promoted the enslavement of Mexicans, especially slave Yaqui labor for the sisal plantations. Recent events during the rule of Felipe Calderon show that the Mexican government still has a very low regard for its citizens' rights. Tens of thousands of Mexicans killed during the Calderon-initiated drug war against the Zetas (he is a Sinaloa backer) and more tens of thousands of Mexicans who just disappeared, their deaths not investigated by the Federal government.

Look at recent history: then Mexican President Salinas giving away the government owned Telmex to Carlos Slim (who bought the phone company on credit) to continuing corruption in PEMEX to the arrest now of the thieving union president for life Gordillo, after stealing $200 million over decades as the "maestra."

Just a quick comment on my part. I have a friend who just came back from a stint in China where he indicated that the shops he was working at have experienced a 35% wage increase over the past year due to demand for skilled employees, etc. Given that China is focusing to a much greater extent on education than Mexico is this is not surprising. Tradespeople in China have a level of experience and training far beyond that that can be found here in Mexico. Combine a number of these elements and the proximity to the US and it's likely that Mexico is experiencing something of a "low labor cost market" pickup.

Mexico should not be rejoicing this fact although I suspect that the wealthy of Mexico do.

I could not log in to leave a comment on your excellent article that so well captured the loathing heaped on Ester Gordillo, who just got arrested...finally...makes my day, she has so massacred the Mexican public schools

nobody I know in Mexico is optimistic, must be a Plutarch type of mind set, rich spin doctors and their lackies in the press fomenting this BS.....take an informal poll anywhere and folks are doubtful...why?.....corruption and amiguismo are rampant...they all stand in line like horses at a trough and have since the "revolution"

They might eventually be able to break up some of Slim's oligopolies, but it will take years (he's got them tied up in courts). The only way to do it faster would be for the Mexican Congress to pass laws ordering a break-up of the sectors in question, but that seems unlikely too.

If the Mexican government can get away from taxing PEMEX into insolvency, maybe they'd be able to fund the infrastructure necessary to get at the deepwater oil and gas reserves. I'm a little more optimistic about that, than about Slim's companies getting broken up.